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U.S. Commerce Department Imposes New Restrictions on Huawei

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On August 17, 2020, the U.S. Department of Commerce Bureau of Industry and Security (BIS) made available for public inspection a final rule expanding restrictions on Huawei Technologies Co., Ltd. and its non-U.S. affiliates on the BIS Entity List (collectively “Huawei”).

In the final rule, BIS announced a further expansion of the direct product rule asserting U.S. jurisdiction over foreign-manufactured items with respect to Huawei, ended the Huawei Temporary General License (TGL), added 38 non-U.S. Huawei affiliates to the BIS Entity List, and clarified that Entity List license requirements apply to transactions where Huawei acts in a variety of roles as a “party to the transaction.”

In a concurrent final rule, BIS clarified that license requirements under the Entity List apply where the listed party is a “party to the transaction,” whether acting as a purchaser, intermediate or ultimate consignee, or end-user as defined in the Export Administration Regulations (EAR).

These actions, while not officially published in the Federal Register until August 20, 2020, are effective as of August 17, 2020.

Changes Expand the Direct Product Rule for Huawei

BIS has further expanded the direct product rule as applied to parties on the Entity List that have a Footnote 1 designation, which currently is limited to Huawei. Key changes to the direct product rule for transactions with Footnote 1 entities are:

  • The rule eliminates the previous threshold test of whether the foreign-made product was “produced or developed” by Huawei as provided in the May 15, 2020 interim final rule (discussed here). This expands the scope of U.S. jurisdiction and the application of prohibitions under the Entity List. Now even if the product was not specially made for Huawei, foreign-made items are subject to U.S. license requirements when either of the following conditions apply:
    • The foreign made products are the direct product of U.S. technology or software described in the following ECCNs: 3D001, 3D991, 3E001, 3E002, 3E003, 3E991, 4D001, 4D993, 4D994, 4E001, 4E992, 4E993, 5D001, 5D991, 5E001, or 5E991. Note that these classifications are for the technology and software used to make the product, they are not limitations on the classifications of the end products that are subject to license requirements.
    • The foreign-made products are produced by a plant or major component of a plant that is the direct product of U.S. technology or software with the ECCNs listed above.
  • Both these rules apply regardless of the level of export control of the item being manufactured. These aspects of the special direct product rule for Huawei were part of the previous version of the rule but take on increased significance with the elimination of the “produced and developed” by Huawei test.
  • Practically speaking, the updated rule will capture off-the-shelf items if they otherwise meet all Footnote 1 criteria, removing the uncertainty over what it means for an item to be “produced or developed” by the Footnote 1 entity.
  • The Federal Register notice clarifies that any equipment subject to the Export Control Classification Numbers (ECCNs) specified in Footnote 1 that is involved in any of the “production” stages is considered essential for purposes of Footnote 1 paragraph (b). This includes product engineering, manufacture, integration, assembly (mounting), inspection, testing, and quality assurance. Therefore, use of any of these types of equipment that are the direct product of U.S. technology will make the end products subject to the EAR for purposes of the Huawei restrictions.
  • The amended direct product rule applies to transactions where (1) the foreign-produced item will be incorporated into, or will be used in the “production” or “development” of any “part,” “component,” or “equipment” produced, purchased, or ordered by an entity with a Footnote 1 designation; or (2) when an entity with a Footnote 1 designation is a party to any transaction involving the foreign-produced item, e.g., as a “purchaser,” “intermediate consignee,” “ultimate consignee,” or “end-user.” In other words, the restrictions apply where Huawei is a “purchaser” or where the foreign-made item is being incorporated into a product ordered by Huawei, even when Huawei never takes physical possession of the item.
  • The rule retains a presumption of denial licensing policy for exports to Footnote 1 entities, but includes a case-by-case review policy for foreign-made items that are capable of supporting the “development” or “production” of telecom systems, equipment and devices at only below the 5G level (e.g., 4G, 3G, etc.).
  • Finally, there is a “savings clause” for items produced outside the United States by a plant or major component of a plant that is the direct product of U.S. technology or software. For items that started production prior to August 17, 2020, and would not have been subject to the EAR under the prior rule, the Entity List prohibitions will not apply where exported, reexported or transferred on or before September 14, 2020.

Removal of Huawei Temporary General License (TGL) and Addition of Footnote 2 Designation

The final rule confirms that the TGL authorizing certain dealings with Huawei which expired on August 13, 2020 will not be extended.

The rule further adds a new Footnote 2 to the Entity List designations that retains a limited aspect of the TGL. Like Footnote 1, Footnote 2 is only applicable to Huawei and allows for limited disclosures of information to Huawei regarding security vulnerabilities in items owned, possessed or controlled by Huawei when related to the process of providing ongoing security research critical to maintaining the integrity and reliability of existing and currently “fully operational network” and equipment.

Additional Non-U.S. Affiliates of Huawei Added to the Entity List

The following 38 new Huawei affiliates across 21 countries were added to the Entity List.  BIS states there is reasonable cause to believe that Huawei otherwise would seek to use these entities to evade the restrictions imposed by the Entity List.

Huawei Cloud Computing Technology; Huawei Cloud Beijing; Huawei Cloud Dalian; Huawei Cloud Guangzhou; Huawei Cloud Guiyang; Huawei Cloud Hong Kong; Huawei Cloud Shanghai; Huawei Cloud Shenzhen; Huawei OpenLab Suzhou; Wulanchabu Huawei Cloud Computing Technology; Huawei Cloud Argentina; Huawei Cloud Brazil; Huawei Cloud Chile; Huawei OpenLab Cairo; Huawei Cloud France; Huawei OpenLab Paris; Huawei Cloud Berlin; Huawei OpenLab Munich; Huawei Technologies Dusseldorf GmbH; Huawei OpenLab Delhi; Toga Networks; Huawei Cloud Mexico; Huawei OpenLab Mexico City; Huawei Technologies Morocco; Huawei Cloud Netherlands; Huawei Cloud Peru; Huawei Cloud Russia; Huawei OpenLab Moscow; Huawei Cloud Singapore; Huawei OpenLab Singapore; Huawei Cloud South Africa; Huawei OpenLab Johannesburg; Huawei Cloud Switzerland; Huawei Cloud Thailand; Huawei OpenLab Bangkok; Huawei OpenLab Istanbul; Huawei OpenLab Dubai; and Huawei Technologies R&D UK.

As with the other Huawei entities designated on the Entity List, the new entities have a license requirement for all items subject to the EAR.  A license is not required for EAR99 technology or AT-only controlled technology when released to members of a “standards organization” for the purpose of contributing to the revision or development of a “standard.”  The license review policy is “presumption of denial.”

Clarification Regarding Entity List Requirements to Purchaser, Intermediate or Ultimate Consignee, and End-User

In a concurrent final rule, BIS clarified that the Entity List’s license requirements apply to any listed entity when that entity is acting as a purchaser, intermediate or ultimate consignee, or end-user as defined in the EAR.

This clarification applies not only to Huawei but to all parties on the Entity List. With this new clarification, BIS seeks to make clear the scope of the Entity List’s licensing requirements. Exporters must therefore consider not only the end user or recipient of an item subject to the EAR, but also whether a listed company is otherwise acting as a “party to the transaction,” including as a purchaser.

This rule is limited to clarification of “party to the transaction”, and does not cause the special definition of foreign direct product under Footnote 1 for Huawei, to apply to parties on the Entity List that are not designated with Footnote 1.